Investing & Performance | 9 October 2024
Monthly update: Markets rally after Fed’s rate cut
Markets recovered from a challenging start to the month after the US Federal Reserve made its first interest rate cut since 2020.
WHAT’S HAPPENING IN FINANCIAL MARKETS?
It was a slow start to the month for markets due to US slowdown fears, but they quickly rallied after the US Federal Reserve (Fed) cut rates for the first time in four years.
The Fed decided to lower its key borrowing rate by half a percentage point, signalling the start of an expected, gradual easing of monetary policy. We expect the Fed to reduce its benchmark by another 0.5% by the end of the year.
The key takeaway from the announcement? The Fed is confident inflation is moving toward its 2% target. And it remains committed to supporting the labour market and economic growth for as long as necessary.
“Company earnings remain strong so this transition to a slightly slower rate of growth doesn’t impact our outlook for now, especially as the Fed cutting interest rates should help support economic activity.”
Lilian Chovin, Head of Asset Allocation, Coutts
Encouraging economic data
Markets also received a boost after improved economic data eased those fears of a broader slowdown in the US economy. US inflation softened to 2.5% in August, down from 2.9% in July – its lowest level since February 2021 – according to the Bureau of Labor Statistics.
The jobs market also showed signs of strengthening. The Bureau of Labor Statistics also shows that the US unemployment rate dipped slightly in August, and employers added 142,000 jobs. Retail sales also rose by 2.1% in August, adding to the positive market sentiment.
Lilian Chovin, Head of Asset Allocation at Coutts, says: “Survey indicators suggest the US economy is currently growing at a healthy rate, with fears of a downturn easing after the improved employment data. Estimates from the Federal Reserve Bank of Atlanta suggest GDP is around 3%, far from recessionary levels.”
Elsewhere, the Bank of England (BoE) and Bank of Japan (BoJ) both opted to pause their respective rate cutting and hiking cycles.
While the BoE has suggested potential rate cuts could come as soon as November, the BoJ has indicated the possibility of gradual rate hikes in response to mounting inflationary pressures. The European Central Bank (ECB), meanwhile, cut interest rates by a quarter percentage point.
WHAT DOES THIS MEAN FOR YOUR INVESTMENTS?
Despite recent positive data, we are now seeing the rate of economic growth in the US starting to slow. This is a normal part of the business cycle and something we’d been expecting for several months. Despite this, corporate earnings remain strong and continue to trend upwards.
We were already aware of the changing landscape so had taken profit on high-yield debt and gold, which had performed well, and increased exposure to safer US government bonds. These bonds are expected to do better given the outlook for growth and inflation.
Lilian explained: “Company earnings remain strong so this transition to a slightly slower rate of growth doesn’t impact our outlook for now, especially as the Fed cutting interest rates should help support economic activity.
“We continue to favour equities, as they typically perform well during periods of slowing economic growth and easing monetary policy.”
The value of investments, and the income from them, can go down as well as up, and you may not receive the amount of your original investment. Past performance should not be taken as a guide to future performance. You should continue to hold cash for your short-term needs.
THIS MONTH’S SPOTLIGHT: China looks to boost its faltering economy
China’s economic growth continues to slow, weighed down by a stumbling real estate market and falling consumption. There has been a raft of disappointing data in recent months suggesting the world’s second-largest economy could miss its 5% growth target this year.
Since China lifted its strict lockdowns in 2022, the economy has struggled to return to its pre-pandemic growth rate. Exports have plummeted, and ongoing geopolitical tensions with the US have further dampened market sentiment.
Growth has been dragged down by weakening consumption and slowing industrial output. Retail sales rose only 2.1% in August despite the summer travel peak, falling from a 2.7% increase in July, according to the National Bureau of Statistics. Meanwhile, industrial output rose by 4.5% in August from a year ago, down significantly from July’s 5.1% rise.
In an attempt to revive the flagging economy, China’s central bank has announced plans to lower borrowing costs and allow banks to increase their lending, which has helped lift Asian markets. China’s stimulus plans should also be good news for European stocks, as increased economic activity in China could boost demand for European exports – notably luxury goods companies.
More broadly, a rebound in Chinese economic growth would be good news for global growth which has relied heavily on the US engine for some time.
Clients can find out more about our investment approach by speaking to their private banker.
The above article has been written and published by Coutts Crown Dependencies investment provider, Coutts.
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